Decision impact statement

Sanctuary Lakes Pty Ltd v Commissioner of Taxation

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Court Citation(s):
[2013] FCAFC 50
2013 ATC 20-395
(2013) 90 ATR 762
(2013) 212 FCR 483
[2013] HCA Trans 273

Venue: Federal Court of Australia
Venue Reference No: VID 520 of 2012 and VID 521 of 2012
Judge Name: Edmonds, Greenwood and Griffiths JJ
Judgment date: 24 May 2013
Appeals on foot: No
Decision Outcome: Partly Favourable

Impacted Advice

Relevant Rulings/Determinations:

• None

Impacted Practice Statements:

• PS LA 2011/30

Subject References:
Deductions
Reasonable care
Reasonably arguable position
Remission of administrative penalty

Précis

Outlines the ATO's response to this case which concerned whether the taxpayer was entitled to various deductions and whether related penalties were properly imposed and remitted.

Brief summary of facts

The taxpayer was involved in the development of the Sanctuary Lakes Resort, a residential development located in Point Cook, Victoria. Various related entities, including the taxpayer, were responsible for different functions of the development, and, in doing so, entered into a number of agreements. In its tax return for the 2003 income year, the taxpayer claimed deductions for losses and outgoings said to have been incurred under the various agreements.

After an ATO audit into the taxpayer's involvement in the development, the Commissioner issued an amended assessment to the taxpayer, disallowing a number of the deductions claimed. The Commissioner also assessed the taxpayer to a 25% administrative penalty on alternative bases - in relation to 3 issues, on the basis that the taxpayer or its agent failed to take reasonable care in filing its 2003 return; and, in relation to 2 issues, on the basis that the taxpayer did not have a reasonably arguable position (RAP).

On review, the AAT (DP Forgie) agreed with the Commissioner that the taxpayer was not entitled to any of the deductions in dispute: [2012] AATA 404. The AAT also decided that the various tax shortfalls resulted from a failure by the taxpayer or its agent to take reasonable care. However, the AAT decided to fully remit the penalty payable in relation to one of the issues in dispute, on the basis that the taxpayer had a RAP on the issue.

Both parties appealed to the Federal Court from the decision of the AAT. In his appeal, the Commissioner argued that the basis of the AAT's decision to remit penalty payable was inconsistent with the decision of the Court in FC of T v Traviati (2012) 205 FCR 136. The Full Federal Court dismissed both appeals. On 8 November 2013, Crennan and Bell JJ refused special leave to the taxpayer to appeal to the High Court from the decision of the Full Court. The Commissioner did not seek special leave to appeal to the High Court.

Issues decided by the court

The Full Federal Court dismissed the taxpayer's appeal. The Court found that both claimed losses were of capital or of a capital nature, and agreed with the AAT that the claimed outgoing was not incurred by the taxpayer in the 2003 income year (paragraphs 111-130). In relation to the penalty issues, the Court (agreeing with Traviati) rejected the taxpayer's argument that it necessarily follows that the taxpayer and its agent must have taken reasonable care if it had a RAP (paragraph 150). As having a RAP and taking reasonable care are independent statutory standards, there is no reason to suppose that the application of the reasonable care test must include a consideration of whether a taxpayer has a RAP (paragraph 151).

The Court also dismissed the Commissioner's appeal. In disagreeing with the view expressed in Traviati, the Court held that the AAT did not take into account an irrelevant consideration, in exercising its discretion to remit penalty under section 298-20 of Schedule 1 to the Taxation Administration Act 1953 (TAA), in considering the fact that the taxpayer had a RAP on the deduction issue in dispute (paragraph 225). By majority (Edmonds and Griffiths JJ, Greenwood J dissenting), the Court also found that the AAT did not apply the wrong test under section 298-20. The AAT acknowledged that there needed to be circumstances that could mitigate the taxpayer's failure to take reasonable care, and appreciated that the particular circumstances of the taxpayer were relevant to its decision (paragraphs 273-5).

Griffiths J noted that section 298-20 is unconfined in its terms, and that the scheme of Divisions 284 and 298 does not preclude a consideration of the fact of a RAP from the exercise of the discretion in that section (paragraphs 227 and 240). While the power under section 298-20 requires consideration of the particular circumstances of a taxpayer, the fact that the taxpayer in this case had a RAP on the construction of contractual provisions to which it was a party is a matter which necessarily relates to its particular circumstances (paragraph 251).

His Honour also noted that the decision in Traviati erred in reading the earlier Full Court decision in Dixon v FC of T (2008) 167 FCR 287 as requiring a decision maker under section 298-20 to determine whether it is harsh in the particular circumstances of a taxpayer to impose the penalty. The correct question under section 298-20 is not expressed in terms of 'harshness', but rather as to whether the decision maker is satisfied, having regard to a taxpayer's particular circumstances, that it is appropriate to remit a penalty (paragraphs 247-9).

ATO view of Decision

The ATO notes that, while it is unusual for a taxpayer to have a RAP under the income tax law, but to be found not to have taken reasonable care in making statements to the Commissioner, the Full Court has recognised that having a RAP and taking reasonable care are independent statutory standards for the imposition of administrative penalties. Importantly, the Court has rejected the proposition that it necessarily follows that a taxpayer and the taxpayer's agent must have taken reasonable care in making statement if the taxpayer had a RAP under the law.

The ATO accepts the Full Court's decision that, in deciding under section 298-20 whether to remit a penalty imposed for failing to take reasonable care, a decision maker may take into consideration a finding that the taxpayer has a RAP under the income tax law. In other words, nothing in the legislation makes such a consideration necessarily irrelevant to the question.

However, the Full Court did not state, and its reasoning does not imply, that the existence of a RAP is a matter that a decision maker is necessarily bound to take into account in exercising the discretion under section 298-20 (see also FC of T v Burness (2009) 77 ATR 61, at [54]).

Accordingly, the weight (if any) to be given to the existence of a RAP is for decision makers to determine from case to case having regard to all of the particular facts and circumstances of the case.

The ATO also accepts that the correct question under section 298-20 is not expressed in terms of 'harshness', but rather in terms of whether the decision maker is satisfied, having regard to a taxpayer's particular circumstances, that it is appropriate to remit a penalty. The Full Court recognised that the earlier comments in Dixon about the question of the 'harshness' of the penalty simply reflected the approach that had been taken by the AAT in that case based on the circumstances that had been considered.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

None.

Implications on Law Administration Practice Statements

The ATO will amend paragraph 17 of PSLA 2011/30 to ensure consistency with the comments of the Full Court on the question to be determined under section 298-20.

Related Rulings/Determinations:

• Miscellaneous Taxation Ruling MT 2008/1
• Miscellaneous Taxation Ruling MT 2008/2

Miscellaneous Taxation Ruling MT 2008/1
Miscellaneous Taxation Ruling MT 2008/2
Related Practice Statements:

• PS LA 2011/30
• PS LA 2012/4
• PS LA 2012/5

PS LA 2011/30
PS LA 2012/4
PS LA 2012/5

Legislative References:
Income Tax Assessment Act 1936
s 223(1)
s 227(3)

Income Tax Assessment Act 1997
s 8-1

Taxation Administration Act 1953
Schedule 1 s 298-20

Planning and Environment Act 1987 (Vic)
s 173

Case References:
BHP Billiton Direct Reduced Iron Pty Ltd v DFC of T
[2007] FCA 1528
2007 ATC 5071
67 ATR 578

C of T v Dixon
[2007] FCA 1079
2007 ATC 4748
67 ATR 87

C of T v Woolcombers (WA) Pty Ltd
(1993) 47 FCR 561
27 ATR 302
93 ATC 5170

Craig v SA
[1995] HCA 58
(1995) 184 CLR 163

Dixon v FC of T
[2008] FCAFC 54
(2008) 167 FCR 287
2008 ATC 20-015
69 ATR 627

Elias v C of T
[2002] FCA 845
(2002) 123 FCR 499
2002 ATC 4579
50 ATR 253

FC of T v Traviati
(2012) 205 FCR 136
[2012] FCA 546
2012 ATC 20-321

FC of T v Burness
[2009] FCA 1021
(2009) 77 ATR 61
2009 ATC 20-135
77 ATR 61

FC of T v Malouf
(2009) 174 FCR 581
[2009] FCAFC 44
2009 ATC 20-099
75 ATR 335

Fowler v C of T
[2012] FCA 1040
2012 ATC 20-351

Malouf v FC of T
[2008] FCA 497
(2008) 68 ATR 470
84 ATC 4580

Minister for Aboriginal Affairs v Peko-Wallsend Ltd
[1986] HCA 40
(1986) 162 CLR 24

Minister for Immigration v Yusuf
(2001) 206 CLR 323
[2001] HCA 30

Pratt Holdings Ltd v FC of T
[2012] FCA 1075
2012 ATC 20-354

Sent v FC of T
[2012] FCA 382
2012 ATC 20-318
85 ATR 1

Walstern Pty Ltd v FC of T
(2003) 138 FCR 1
[2003] FCA 1428
54 ATR 423
2003 ATC 5076